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The spirit of capitalism, stock market bubbles and output fluctuations

Takashi Kamihigashi

International Journal of Economic Theory, 2008, vol. 4, issue 1, 3-28

Abstract: This paper presents a representative agent model in which stock market bubbles cause output fluctuations. Assuming that utility depends directly on wealth, we show that stock market bubbles arise if the marginal utility of wealth does not decline to zero as wealth goes to infinity. Bubbles can affect output positively or negative depending on whether the production function exhibits increasing or decreasing returns to scale. In sunspot equilibria, the bursting of a bubble is followed by a sharp decline in output one period later. Various numerical examples are given to illustrate the behavior of stochastic bubbles and the relationship between bubbles and output.

Date: 2008
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https://doi.org/10.1111/j.1742-7363.2007.00066.x

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International Journal of Economic Theory is currently edited by Kazuo Nishimura and Makoto Yano

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